It’s all about the under-supply, right?
Persistent under-delivery of new housing relative to demand has caused house prices to soar and priced many people out of the market, right? Wrong: housing delivery has been in-line with new household formation and forecasts for 250k new dwellings per annum are far too high.
The most common explanation you will find for the unaffordability of the UK housing market is that the demand for housing far outstrips new supply.
The official 2008 based household projections, from which forecasts for housing demand are made, puts new household formation at approximately 240k households per annum while the expansion of housing stock peaked at 207k dwellings per annum in 2007 and is currently expanding at 121k dwellings per annum. From this, the obvious conclusion reached by many in government and the market is that we were under-delivering by 33k units even at the peak of the market and we are currently building half the required amount.
However it is not that simple. The household projections probably overstate the international migration component over the medium term (even the OBR use a lower migration assumption) but the largest error comes from the conversion of the population into households. During the ten years period from 1991 to 2001, the average size of the UK household fell from 2.50 people per household to 2.41. Since then, household projections have assumed that this scenario would continue and projected the ratio to fall to 2.35 in 2011 and 2.27 in 2021. However the 2011 census has showed that this ratio has remained fixed at 2.40 and therefore the household projections have significantly overstated the level of household formation since 2001.
We actually find that the number of new households formed in England during the period 2001 to 2011 was 154k per annum compared to an increase in stock of 161k per annum which are both below the 187k per annum predicted by the household projections.
Looking forward at the increase in households between 2011 and 2021 and the frequently quoted 240k new households per annum looks highly unrealistic and a more appropriate benchmark would be using the 2010 low migration projections with a fixed household size. This forecasts housing demand of 152k households per annum over the next ten years which is very similar to the previous ten years. Under this assumption we currently have an under-supply of housing in the region of 32k units per annum.
In conclusion we do not have an existing housing shortage but a small one is possibly developing as a result of lower housing delivery. Rather than targeting massive increases in new supply across the country we need targeted delivery of units in select locations at appropriate prices.